Should Your Institution Use an Unallocated Reserve?
Feb 11, 2015
Institutions often run into the difficult question of whether or not to use an unallocated reserve in their allowance. This can be met with mixed opinions from auditors and regulators; however, it is allowed by guidance and often times serves a very important need. An unallocated reserve is meant to provide a reserve for any factors that fall outside of qualitative and environmental factors. Often times institutions will use an unallocated reserve for natural disasters, certain political issues that could affect their constituents or other factors that cannot be captured within the recommended qualitative factors.
Financial institutions often come into the hard question of when they should use an unallocated reserve and if they should. And this is really a tough question, because I think a lot of institutions are hearing different things from their external auditors and their regulators. And, that’s a very difficult position to be in. We certainly feel for them in that instance because you really do have to please both parties, if you will. External auditors are not that pleased with the usage of unallocated reserves, while regulators are. In terms of guidance, unallocated reserves are accepted practice to identify a reserve amount that cannot be controlled or identified through the typical FAS 114 or FAS 5 process. Although guidance does state that unallocated reserves can also be associated to qualitative adjustments to the typical FAS 5 analysis. Definitely they can utilized. I think the main important thing to focus on when using unallocated reserve is to document and identify why we are using the unallocated reserve and identify how much should be going towards that unallocated reserve in the most quantifiable sense possible.